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Updated January 22, 2019 Introduction to U.S. Economy: Personal

Personal saving, which includes the saving of households 401(k) is a saving vehicle for their future after but not of businesses or government, can have a significant retirement, but before retirement, those funds are generally impact at both the individual and economy-wide levels in invested in various companies through the purchase of the long and short terms. stocks and bonds.

Economic Considerations The overall level of is one of the main The saving rate, which is the ratio of total personal determinants of long-term . Business to disposable income, presents a tradeoff between current in physical capital (i.e., machinery, buildings, and future consumption. A relatively low saving rate and factories) allow the economy to produce more implies higher current consumption but lower future and services with the same amount of labor or raw consumption. Greater present consumption supplies materials, increasing the productive capacity of the individuals now; however, it leaves little to be invested in economy. As such, all else equal, a higher saving rate will capital projects that will boost future living standards. result in a higher level of physical capital over time, Conversely, a relatively high saving rate implies lower allowing the economy to produce more . current consumption but higher future consumption. This For further information on business investment, refer to tradeoff has implications for both short-term and long-term CRS In Focus IF11020, Introduction to the U.S. Economy: economic growth. Business Investment.

Short-Term Economic Impacts How is Personal Saving Measured? In the short term, a rising personal saving rate can be a generally track economy-wide saving via the temporary impediment to economic activity, assuming no personal saving rate (see Figure 1). other changes to income. If on average individuals begin saving a larger portion of their paychecks, it means less Figure 1. Personal Saving Rate is being spent on consumer goods and services in the economy. Because consumer spending makes up about 70% of the U.S. economy, even a small decrease in consumer spending can reduce and economic activity. Alternatively, a falling saving rate may result in temporarily faster economic growth as individuals spend a larger portion of their pay on goods and services.

A rise in the saving rate during an economic downturn can be problematic. In response to a , individuals may rationally respond to increased uncertainty about their future income by increasing their saving rate to protect them from potential job loss or reduced income in the near future. As a result, however, the economic downturn is further exacerbated due to the additional decrease in consumer spending resulting from the rising saving rate. By Source: Bureau of Economic Analysis contrast, in the midst of a healthy and expanding economy, Notes: Ratio of total personal saving to total disposable income in a rising saving rate may result in a more sustainable level of the United States. Grey bars represent . consumer spending, thus preventing the economy from overheating. An overheating economy occurs when demand Since the early 1970s, the U.S. personal saving rate has for goods and services exceeds the economy’s ability to fallen from above 12% to a low of 1.9% in 2005. Following produce those goods and services, which is often the beginning of the 2007-2009 recession, the saving rate characterized by accelerating followed by a briefly increased before beginning to fall again. Over the recession. past year, the saving rate has averaged about 6.7%, suggesting that for every $100 of disposable income Long-Term Economic Impacts individuals are spending about $93.30 and only saving In the long term, however, a higher saving rate will about $6.70. generally lead to higher levels of economic output, up to a point. When individuals save a portion of their income, The personal saving rate produced by the Bureau of those saved funds are generally loaned out to businesses to Economic Analysis (BEA) is measured as the difference finance new investments. For example, an individual’s between aggregate income and consumption spending,

https://crsreports.congress.gov Introduction to U.S. Economy: Personal Saving which likely introduces some measurement error into the Figure 2. Average Real Hourly Earnings indicator. The saving rate may understate the level of Production and Non-Supervisory Employees saving in the economy because certain spending is considered consumption spending, even though such spending is conventionally thought of as investment, such as spending on durable consumer goods (e.g., automobiles, appliances). Additionally, BEA does not include changes in asset or capital gains as income under the saving rate measure.

Alternative measures also show that many households are struggling to save any portion of their income. According to the Federal Reserve, in 2016, about 47% of adults reported saving some portion of their income over the past 12 months, whereas 31% of adults reported their income was equal to their spending, and 16% reported spending more than they earned. Additionally, saving varies dramatically based on income level, as shown in Table 1. Among Source: CRS calculations using data from Bureau of Labor Statistics families with an income in the bottom 20th percentile, less Notes: 2018 Dollars. Adjusted for inflation using the Consumer than one-third of families saved any portion of their Index. Grey bars denote recessions. income. Among families with an income in the top 10th In addition, according to some measures, real (i.e., percentile, about 82% of families saved some portion of inflation-adjusted) for non-managers fell between the their income. mid-1970s and the mid-1990s, as shown in Figure 2. In the face of falling real wages and purchasing power, some Table 1. Family Saving by Income Level, 2016 families may have reduced the proportion of each paycheck they saved to maintain their lifestyle and consumption Percentile of Median Income Families That patterns. The decline in real wages may have resulted in Income (Thousands) Save (Percent) some of the decline in the saving rate, though the increase Less than 20 15.2 32.1 in wages since the mid-1990s has not been accompanied by a return to the peak saving rate of the 1970s. 20–39.9 31.4 45.2 Foreign Investment Inflows 40–59.9 52.7 57.2 Following the declining U.S. personal saving rate, net 60–79.9 86.1 64.9 national saving and investment (as percentages of GDP) have also been in decline over the past few decades. Net 80–89.9 136.7 72.5 national saving includes all personal, business, and government savings. Net national investment includes all 90–100 260.2 82.3 investment in capital goods and services, less depreciation. Source: Federal Reserve, Survey of Consumer Finances, 2016. U.S. net national investment tends to exceed net national Notes: Income percentiles based on total family income. saving, due to investment inflows from abroad. Investment inflows from abroad likely support higher levels of Declining Saving Rate investment and economic activity in the United States than Economists posit a number of reasons for the decline in would be possible using domestic saving exclusively. saving. The most prominent explanation involves the increase in asset prices, including the stock and However, these investment inflows from abroad have housing prices since the mid-1980s. The overall increase in implications for aggregate income within the United States. of the stock market and housing prices increased the Investments generate income streams for those who make net wealth of households holding these assets. The increase the investment. When investments are made from abroad, in wealth tends to lead to increased consumption spending the income generated from those investments are paid to by households, driving down the personal saving rate. individuals abroad, whereas when investments are made by However, not all households own homes or financial assets. individuals inside the United States, the income generated is paid to individuals in the United States. As such, a higher An alternative explanation for the declining saving rate share of investment from abroad, while supporting involves an increase in access to consumer credit over the economic activity inside the United States just the same as past several decades. As access to credit increases, domestic investment, results in a higher share of the income individuals generally increase their consumption, taking on generated within the United States being distributed abroad. debt to finance those purchases. This increase in (Note: This In Focus was originally authored by Jeffrey consumption spending has not been fully matched by an Stupak, former CRS Analyst in Macroeconomic Policy.) increase in disposable income, leading to a decline in the saving rate. Marc Labonte, Specialist in Macroeconomic Policy

IF10963

https://crsreports.congress.gov Introduction to U.S. Economy: Personal Saving

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